Investing in social media influencers

In a lawsuit filed in New York in October 2018, public relations firm PR Consulting claimed that Luka Sabbat, a 21-year-old model, actor, and self-proclaimed "young creative entrepreneur", had violated a $60,000 influencer agreement to promote Snap Inc.'s Spectacles. Snap's smart glasses feature a camera that can record video for posting to Snapchat and other social media platforms. The company expected Sabbat to use them to post to his Instagram account during fashion weeks in Paris, Milan, and New York in September 2018.

As part of his influencer agreement, Sabbat was required to "create original content for a minimum of four unique posts", include hyperlinks to additional material, submit the posts for approval prior to publication, and be photographed in public "wearing product tied to the Spectacles Marketing Campaign", according to the lawsuit.

This type of deal is now common. Increasingly, businesses are turning to influencers — social media personalities with identifiable, engaged audiences — to create or share branded content with their followers in the hopes of influencing brand perceptions and purchasing decisions. As a strategy, it makes sense: According to PwC's Global Consumer Insights Survey 2018, social media ranked first in consumer "purchase inspiration".

But influencer deals and relationships aren't risk-free. PR Consulting is suing Sabbat, alleging that he accepted a $45,000 advance but made only two of the contractually required posts, didn't submit them for approval, and was never photographed in public wearing the glasses. In effect, PR Consulting was alleging that Sabbat failed to influence any of his 1.7 million Instagram followers into buying smart glasses, which sell for $149—$199, even though he accepted money to do so. Sabbat denied that he breached the agreement in a November 2018 court filing. The case is ongoing.

While the amounts involved may seem small, the case highlights several challenges for businesses in the coming years: how to effectively reach in new ways consumers inured to traditional advertising, how best to protect themselves, and how best to measure the return on investing in those novel ways.

Marketing will answer the first question, but it will be up to finance departments to help answer the others.

Changing landscape

Finance departments may soon see a lot of influencer marketing show up in budgets. "Brands are allocating more of their budgets to influencer marketing because they are seeing the trackable and reliable business value that the channel has," said Arron Shepherd, co-founder of London-based The Goat Agency, an influencer marketing agency.

Research from a May 2018 survey by the World Federation of Advertisers (WFA) found that 65% of global companies surveyed planned to increase their spending on influencers in the next year. Financial investment will be migrating from traditional ad buys and celebrity endorsements into more targeted, nuanced campaigns requiring a new set of key performance indicators (KPIs). Business Insider Intelligence estimates that total global spending on influencer marketing could reach between $5 billion and $10 billion per year by 2022. Influencer marketing is rapidly gaining importance in markets such as India, China, and the US.

Beauty and fashion brands have led the charge so far, shifting their budgets to influencer marketing in a huge way, but other industries are starting to follow suit.

"We're seeing brands like Casper, Hims, Blue Apron, Choosy, Allbirds, Glossier, Scentbird lean in hard to influencer-first marketing over traditional out-of-home advertising or print media," said Mae Karwowski, founder and CEO of New York-based influencer marketing agency Obviously. "Other industries are just getting started. We've started to see the shift in industries like tech, airlines, hospitality, real estate, and home machinery like lawn mower companies."

Influencer marketing is also no longer only consumer-facing. Companies such as American Express, IBM, LinkedIn, PwC, and SAP all have B2B influencer programmes aimed at business decision-makers. No matter the business, or the consumer, companies will need to invest in influencers, according to one expert.

"Influencers are inspirational, aspirational, and lend a third-party credibility to your brand that is vital in today's business environment," said Jim Tobin, president of Carusele, a North Carolina-based influencer marketing firm. "We're seeing that in B2C, B2B, and C2C businesses."

Variety of relationships

If influencers are becoming a part of the business landscape, what kind of financial relationships and deals can finance departments expect to see? Twenty years ago, when brands wanted to partner with celebrities for marketing campaigns, the options were rather straightforward. They might have hired a famous athlete to endorse a sneaker, or a movie star to promote a drink. The campaigns of yesteryear reached broader, more loosely defined audiences than possible today.

Social media channels such as Facebook, Instagram, Sina Weibo, Snapchat, WeChat, and YouTube have divided audiences into smaller online communities, clustered by common interests and demographics. And they now offer an increasingly precise view of audience behaviour. Influencers tap into the passions of those audiences, whether they are centred on cosmetics, sports, technology, or fashion.

"You have normal people who are really good at storytelling and creating content," Karwowski said. "Their recommendations carry a lot of weight with their followers because they follow their posts every day. So there's a level of authenticity that doesn't exist with celebrities."

That authority is a valuable strategic investment for brands, according to Anneke Schogt, the CEO of Amsterdam-based influencer marketing firm IMA. "The relationship is human-to-human, so if I advise you to do something, you are more inclined to believe me than if there is a billboard behind me, because the relationship is much more direct, much more intimate, and so, more credible."

Financial relationships with influencers do not follow a one-size-fits-all structure. There are as many ways for brands to engage with influencers as there are business goals.

However, there are some typical deals that finance departments might see. The types of relationships include offering influencers free merchandise to plug your product, paying for single posts on one platform that mention your brand, establishing longer-term creative partnerships in which brands and influencers work together to create branded content across multiple platforms, and engaging "brand ambassadors" who fully embrace your brand and share it at every opportunity, according to Tobin, whose company has 60,000 influencers under contract.

Tobin also cautions finance departments to pay close attention to issues such as rights ownership of the content, secondary licensing rights, noncompete clauses, and compliance with local laws when structuring deals and payments with influencers.

"What kind of relationship you have with an influencer depends on what you want to accomplish," he said. "We find that about 20 to 25% of the content does really well compared to the rest, so it is important that brands think carefully and strategically about what they plan to do with that content."

Financial managers should also be aware that influencer campaigns often include multiple influencers — anywhere from five to 20 — working on different platforms at the same time, according to Tobin.

The key measure

Not all influencers are created equal. Broadly, there are three levels of influencers based on their audience size. Macro-influencers generally have more than 200,000 followers; micro-influencers have 20,000—200,000 followers; and nano-influencers have fewer than 20,000 followers.

Those distinctions are important because what brands will have to pay influencers is based partly on their audience reach. Influencers with large audiences can command tens of thousands of dollars per post, while some nano-influencers offer posts for less than $100. And, depending on what the business goals are, that can significantly change the cost of partnering with an influencer.

"It's a little bit Wild West because the rates vary dramatically," Tobin said. "There are no real, definitive standards for what influencers charge." Therefore, he advises that companies come to influencer campaigns with a clear budget, and a clear set of objectives, and work towards determining a cost that matches the business goals.

Not only do finance departments have to be aware of the types of services that influencers can charge for, but also how to price those services. Brands can set cost per thousand impressions, cost per engagement, or cost per action (or conversion) as the key financial marker when working with influencers.

But perhaps the most important measure is an influencer's engagement rate — how many of their followers view, comment, share, or like the content related to your brand, according to Pierre-Loïc Assayag, co-founder and CEO of Traackr, an international influencer marketing platform that helps brands measure returns on influencer campaigns.

"Engagement metrics are the important signal," he said. "Those are the key to changing behaviour and thinking about the impact of a campaign."

No matter which metrics businesses use, for influencer campaigns to make financial sense and to make effective decisions, companies need to be very clear about their objectives from the beginning, whether it is to drive traffic to your website, improve brand sentiment, or increase sales, according to Schogt. Having those objectives in mind will help make paying for the campaigns easier. More importantly, no matter which measure a finance department uses for assessing the investment, paying close attention to the quality of your analytics is key, Schogt said.

"It's really important to make sure that the data points are really high-quality and are accurate," she said.

New KPIs

While every business has different goals and different audiences it is trying to reach, there are some standard KPIs for measuring the success of an influencer campaign, according to the WFA. Most common KPIs include reach and views, engagement, traffic, and other earned media such as press coverage, according to the WFA.

"Influencer marketing requires a new framework, a new set of KPIs," Assayag said. "The challenge for the C-suite is defining the framework and how we measure success." This process of finding new metrics will be "nonlinear, disruptive, and painful" at first, but if companies are "forward thinking", they can find new opportunities, Assayag said.

"There are a number of different ways to measure," Karwowski said. "A lot of brands come to us looking for targeting brand awareness. Other times we need to drive as much traffic as possible with a given target audience to a certain website or certain video." Her agency uses engagement with a post, such as shares, likes, and comments, clicks to a website, video views, promo code usage, and submissions to an email capture page as performance metrics, but that can change based on a company's goals.

"The gold measure is sales," Tobin said, and in his experience influencers "offer good results" in boosting sales for brands. But unless the campaign is directly tied to a sales event, such as an in-store promotion, it can be difficult to measure the impact of influencers.

"It is difficult to compare traditional to influencer because print, or billboards, are not purchased in the same way," said Shepherd of The Goat Agency. "Our philosophy is that companies should be paying for results rather than impressions or "˜eyes on'."

Invest for the long term

"A lot of influencer marketing is happening where people are throwing a little bit of budget at it," said Esme Rice, marketing manager at The Goat Agency, "but not really committing." The best campaigns, she advises, span years. Brands find success when influencer marketing becomes a core part of the long-term strategy.

"It can be very challenging to identify influencers," Karwowski said. "We really stress that you should be testing." She sees smart brands working with anywhere from 100 to several thousand influencers at a time to figure out which relationships yield the best results. When a relationship with an influencer works and companies start seeing positive results, brands are advised to maintain it over the long term.

Shepherd said that, when done right, influencer marketing delivers significant ROI compared with other channels. "What you are getting with influencer marketing," he said, "is that the 1 million eyes you've paid to see your post are not just people walking down the street or watching a certain television show. They are an engaged audience who are already interested in, for example, beauty, and so your beauty product is reaching a more relevant audience. Not only can you target your ads better, but you can include better [calls to action] than traditional marketing."

Risks

As demonstrated by the Snap Inc. case against Luka Sabbat, there is still significant risk in influencer marketing. Contracted influencers can fail to deliver promised posts or produce content that falls flat. Worse, because brands can often cede creative control to the influencers, they run the risk of influencers' creating offensive content and inflicting reputational damage. The Australian government recently apologised and banned the use of influencers after it was discovered that it had spent $600,000 on influencers as part of a fitness awareness campaign, who were later found to be posting offensive material, according to the Australian Broadcasting Corporation. The Australian Air Force spent $52,500 on influencers who were creating and sharing homophobic, racist, and anti-Semitic content.

Companies also face serious compliance risks when dealing with influencers. The US Federal Trade Commission requires that influencers clearly identify when they are being paid for content, and brands face fines for failing to disclose endorsement relationships. In the UK, the Advertising Standards Authority also requires influencers to clearly identify advertising material and financial relationships, or risk financial penalties.

"Influencer marketing requires clear and conspicuous disclosure," Tobin said. "No matter what the relationship is or the expected outcome, it needs to be upfront, honest, and clear what you are doing."

Katherine Raz is a freelance writer based in the US. To comment on this article or to suggest an idea for another article, contact Drew Adamek, an FM magazine senior editor, at Andrew.Adamek@aicpa-cima.com.